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Corporation v LLC: Which is better for startups?

You’re the entrepreneurial type. You and your friend would like to open a gym in your neighborhood strip mall. Or you want to sell mini quiches to a couple of cafés around town. Or you’ve designed an app that, with some help from investors, is destined to be the next big thing on the high-tech market. Questions arise: do you need to form a company to pursue your dream? If so, which type should you choose? Should it be a Limited Liability Company, aka LLC, or a corporation?

The answer in short: forming a company is always a good idea because it will protect your personal assets from any business debt or law suits. And which type of company is better? It depends.

Take the quiche idea, with you as a vendor serving larger businesses. The companies you’ll be working with, your clients, are unlikely to care about the formal structure of your enterprise. They’ll just be happy to be contracting a company rather than an individual who could be seen as an employee. You, on the other hand, will want to spend as little money and energy as possible dealing with regulations, disclosures and accounting, which is why you should form an LLC. This type business is easy to set up and operate — and there’ll still be plenty of time for baking and selling.

What about your and your buddy’s gym, then? Again, gyms are small ventures, and an LLC with you and your friend as owners/members would probably be the better model. Plus, LLCs work well for co-owned businesses. They afford more flexible opportunities between members than corporations. With a properly drafted operating agreement between the members of an LLC, you can deal with such sticky issues as admission of new members, withdrawal of existing members, buyouts, management, etc.

The app idea is a whole different startup story, mainly because you’re looking for investors. Venture capitalists generally prefer corporations over LLCs for a couple of reasons: their investment is better protected, and the shareholder model allows them to earn dividends if your company makes a profit. Also, if you ever want to take your company public, you cannot do that if it’s set up as an LLC.

Bottom line, an LLC usually works better for vendors and for small enterprises, while a corporation is more suitable for businesses that need investors or that want to go public. And what if you were to pick the wrong structure? Easy. You can change things anytime.

by Kevin J. Moore